There was a time, not so long ago, when a high percentage of the residential closings that we were doing were short sales. Short sales really ramped up following the bursting of the housing bubble and then peaked during the foreclosure crisis.  We all know how we got there and we remember the no doc, no review teaser loans.  Short sales were a fact of life.  We represented both buyers and sellers in short sales.  In both cases, we were at the mercy of the lenders in addressing the ridiculous number of requirements for approvals and then waiting for months on end for the approvals to come back.

Fortunately, those days are behind us. Short sales are rare, but not completely gone.  So, if you are selling you’re house, how do you know if a short sale is right for you and what will a short sale mean for you?  I haven’t thought much about these questions for a while, but like most of my blog posts, I am inspired to write about this now because recently, a new client inquired about short sales.  The client was transferred from South Florida to Atlanta, leaving behind a house with an outstanding mortgage balance (combined 1st and second) of over $800,000.  The house is not yet listed for sale, though the client has already relocated.  The agent expects that the house will sell for under $700,000.  The client wanted to know what to do and what will happen.  His first question was whether we should apply for short sale approval with the lenders now.

The answer is no. Obviously, if the agent is correct, there will be a short sale.  However, until a contract is signed, there is no approval to obtain from the lenders because we don’t know the amount of the deficiency.  And, because there are 2 lenders, the contract might be enough to satisfy the 1st mortgage leaving the 2nd unpaid.  If the 1st insists upon full payment, the dynamics of the negotiations would change completely.

In addition, in order to approve a short sale, lenders require an appraisal of the property. The appraisal must be by an approved appraiser and can’t be too old.  So, we couldn’t submit an appraisal yet.  The appraisal might be stale by the time a contract is signed.

Another factor is the client’s ability to pay the deficiency. If the client is liquid or has net worth or otherwise has income, lenders are less willing to write off the deficiency.  Where 2 lenders are involved, the client has a bigger hurdle, especially if the 1st mortgagee takes all of the sales proceeds.  Attempting to obtain pre-contract approval would bring attention to these issues far too early in the process.

At this point, I suggested to the client that it would be a bad idea to have any conversation with either lender until there was a contract in place. Once a contract has been signed, it should be submitted to each lender for approval and a case made for the short sale.  Here, the arguments have to be made that the client is unable to pay the deficiency.  I explained that lenders are supposed to make this decision on a primarily objective basis, but we can give subjective reasons for an economic hardship.  But, since we are not in the crisis mode any more, it is now difficult to predict how lenders will lenders will react and that the client needs to be prepared to address the deficiency.

Short sales can’t be counted on as escape routes for home owners or as a simple alternative to the foreclosure process any more. Lenders are less willing to write off deficiencies without a compelling economic hardship.  Because there isn’t a back log of short sales to approve, lenders will carefully review every request for short sale.  If you have other options, you should consider them as well.

        00170457

        Commercial Real Estate lending continues to explode. Through the third quarter of 2015, CRE loans outstanding totaled over $1.8 trillion.  Over the last 8 years or so, CRE underwriting standards have eased somewhat.  The Federal Reserve, FDIC and Comptroller of the Currency issued a Joint Statement at the end of 2015 warning about this problem.

“The agencies have observed substantial growth in many CRE asset and lending markets and increased competitive pressures are contributing significantly to historically low capitalization rates and rising property values. At the same time, other indicators of CRE market conditions…do not currently indicate weaknesses in the quality of CRE portfolios…. [T]he agencies have also observed certain risk management practices at some institutions cause concern, including a greater number of underwriting policy exceptions and insufficient monitoring of market conditions to assess the risks associated with these conditions.”

        The statement directs financial institutions to reinforce prudent risk management practices and to maintain discipline in CRE lending. Examiners will be closely watching lending practices in the future.

        Lenders have not yet reacted to the statement nor announced plans to change underwriting standards or practices or whether they will scale back CRE lending as a direct result of the statement. But, the question becomes ‘do the agencies see the current CRE conditions as similar to the conditions that lead to the housing bubble and crash of the late 2000’s?’  There, housing values continued to increase, to the point that they were artificially high.  Good underwriting practices were totally ignored and, the combination of the 2 in addition to teaser loans, led to mass loan defaults. Yes, I am purposefully leaving out the CMBS aspect of the bubble, but, from the bank/consumer side, the agencies’ statement of concerns sounds very similar.

        For now, we need to take the statement as a warning – not just to be careful in our CRE lending and borrowing practices. But that the good times in commercial real estate will not last forever.  We know that they never do.  Developers, investors and lenders can hedge against another devastating crash by not growing complacent and succumbing to short cuts as everyone did with the housing crisis.  With good due diligence and smart practice, the next “crash” will only serve as a “market correction”.

    Get Blog Updates

    Get news, insights, and commentary delivered straight to your inbox!
    Click Here

    About Us

    Welcome to Assouline & Berlowe’s Florida Real Estate Law and Investment Blog with news, insights, and commentary for investors, developers, and their advisors.

    Topics

    Recent Updates

    Archives

    Stay ConnectedLinkedIn

    STAY TUNED!
    Get Blog Updates
    We'll send you an email whenever we add a new post.
    Stay Updated
    Give it a try, you can unsubscribe anytime.
    close-link
    Get news, insights, and commentary delivered straight to your inbox!
    Click Here
    close-link